Crude tallies six-session loss of almost 7%

OPEC worries about price drop but stands pat on quotas

SAN FRANCISCO (MarketWatch) -- Crude-oil futures closed under $66 a barrel to tally a six-session loss of nearly 7% Monday as traders weighed the Organization of the Petroleum Exporting Countries' decision to keep members' production quotas unchanged against the potential for an output cut at a later date, after key oil producers voiced concern over the recent drop in oil prices.

The group's production ceiling stands at 28 million barrels per day, excluding output from Iraq. OPEC set forth the quota on July 1, 2005.

"Today's announcement from OPEC may seem like good news but in actuality, with winter coming, OPEC holding steady now may mean a cut in production when we really need it this fall," said commodities trader Kevin Kerr, editor of Global Resources Trader, a newsletter of MarketWatch, the publisher of this report.

"Many analysts believe OPEC will blink at $60," Kerr said, adding that he believes that the figure is more like $65 a barrel.

"The Iran problem is far from over, as much as they would like the world to think it is," he said.

Iran has offered to consider a two-month suspension of uranium enrichment but also set a long list of conditions, a Western diplomat told AFP.

Speaking more generally, Kerr said he believes that at some point "an event of some kind will happen and drive [oil] prices right back up. Traders need to be cautious."

Crude for October delivery fell as low as $64.85 a barrel on the New York Mercantile Exchange, marking its weakest intraday level since March 21. It managed a brief recovery to tap a high of $66.50, then closed down 64 cents at $65.61 a barrel. It's 13.6% below the $75.99 level it closed at a month ago.

The six-day losing streak is the longest in three years, according to a research note from Merrill Lynch Economist David Rosenberg.

Crude futures already dropped more than 4% last week. The losses came as news emerged last week that Alaska's Prudhoe Bay, the biggest oil field in the U.S., is expected to resume full operations sooner than originally expected, possibly by the end of October.

Also on Nymex, October unleaded gasoline fell by 1.45 cents to close at $1.5946 a gallon, after tapping its lowest level since mid-February at $1.584. October heating oil ended at $1.8054 a gallon, down 3.78 cents.

Comfort vs. distress

Global crude supplies "now stand comfortably above their five-year average and are more than adequate to ease concerns in the market about potential supply disruptions or worries arising from geopolitical tensions," the cartel said in a statement issued Monday at the end of its official meeting in Vienna.

Still, it acknowledged that prices have "moderated substantially in recent weeks," and reiterated that OPEC will continue its "proactive policy of supporting market stability by restoring a balance between supply and demand, at prices reasonable to both producers and consumers and conducive to continued world economic growth."

The cartel will hold a special meeting on Dec. 14 in Nigeria and reserved the right to make "necessary consultations" prior to the December meeting, "should market conditions so warrant," OPEC said.

Since OPEC's last conference on June 1, oil prices reached a record high exceeding $70 a barrel for the cartel's reference basket price, said Edmund Daukoru, Nigeria's minister of state for petroleum resources, in his opening address to the conference earlier Monday. The OPEC basket price for 11 types of crude oil stood at $62.12 on Friday.

Daukoru blamed the recent price peaks on "the outbreak of hostilities in Lebanon in the middle of July and fears of hurricanes in the U.S. Gulf closely followed by the sudden shutting-down of the Prudhoe Bay field in Alaska in the first half of August."

Prices have since "softened considerably" and the international oil market "remains well-supplied," Daukoru said.

"OPEC's swagger and confidence that they could continue to keep pumping oil without fear of a price collapse may be faltering," Flynn said.

In related news Monday, energy information provider Platts reported that a survey of OPEC and industry officials on Sept. 7 showed that OPEC's crude production rose by 220,000 barrels per day in August, yielding an average output of 29.91 million barrels per day.

Excluding Iraqi output, production averaged 27.91 million barrels per day. That's up 280,000 barrels per day from the July level but below the OPEC-set quota, Platts said.

Meanwhile, on the broader political front, a senior U.S. envoy said Monday that it welcomed progress at talks aimed at ending the nuclear standoff with Iran but that the United Nations' Security Council plans to move toward sanctions if Tehran doesn't freeze uranium enrichment, the Associated Press reported.

A Western diplomat, giving details of a closed-door meeting between the Iranian nuclear negotiator and the European foreign policy chief last week in Vienna, said Iran had a lengthy list of conditions that would need to be met before Tehran would even consider a temporary suspension in uranium enrichment, according to AFP.

Bearish view

Taking a look at the bigger picture, at least one analyst offered a pessimistic view of the oil market.

"With the end of the U.S. driving season and the failure of any tropical storm to threaten the U.S. Gulf, the potential for worsening fundamentals to encourage a withdrawal of the funds from the market suggests that the price will continue dropping until early winter," said Michael Lynch, president of Strategic Energy & Economic Research.

"Prices seem unlikely to surpass $75 again, and should drift down with occasional bouts of profit taking and hysterical but temporary reaction to weather events," he said.

Natural gas at two-year low

Elsewhere in energy trading, the October contract for natural-gas futures closed little changed, holding at its lowest levels in more than two years on the heels of a three-session pullback last week.

October natural gas fell 0.5 cent to close at $5.67 per million British thermal units following a decline to $5.44 -- the lowest intraday level the contract has seen since July 7, 2004.

"If supportive news in the form of a tropical storm threat or cold winter forecast doesn't emerge soon, prices will probably continue lower," said Michael Fitzpatrick, an analyst at Fimat USA.

In equities, benchmarks tracking stocks in the oil and gas sectors fell, with the Oil Service Index
OSX, +0.94%
suffering from the biggest decline. See Energy Stocks.

And in Monday's metals trading, gold futures dropped under $600 an ounce as silver prices closed at their weakest levels since July. See Metals Stocks.

Taking a broad measure of the commodity-futures markets, the Reuters/Jefferies CRB Index stood at 313.74 points, down 2.1% from the previous session after an intraday low of 313.54. It hasn't traded at levels this low since early December 2005. See more of the latest prices for commodity futures.

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